Plans for Europe's Next Populist Surge Being Made by Investors

11/15/2016

Investment funds are trying to get a handle on the policy plans of the anti-establishment party with the populists’ efforts to topple Italian Prime Minister Matteo Renzi gaining traction. Potentially triggering an election in early 2017, surveys signal opponents spearheaded by Five Star could narrowly defeat Renzi in a referendum on constitutional reform on Dec. 4.

Reflecting investors’ concerns that the upset will add impetus to Five Star and as yields rose around the world in the wake of Donald Trump’s victory in the U.S., Italian government bonds were hit particularly hard last week. Running neck-and-neck with Renzi’s Democratic Party in polls and already seized control of city halls in Rome and Turin this year is the party which wants a referendum on Italy’s euro membership.

“We’re taking Five Star more seriously, we’ve been looking at their program -- even if we have been focusing much more on Trump’s program,” said Andrew Cormack, London-based global portfolio manager at Western Asset Global Management Ltd, which manages assets worth more than $440 billion. “The repercussions of Italy leaving the euro area would be huge. And there is a concern over the lack of experience in the Five Star party,”

With vows to “drain the swamp” of establishment corruption in Washington, Trump rallied his supporters on Nov. 8. Not in Italy, Austria, France and the Netherlands where populist groups are challenging the traditional political powers ahead of votes over the next few months and investors are watching developments in these countries.

Italy’s 10-year yields rose to 2.06 percent on Monday as it breached 2 percent for the first time in 14 months last week. Close to its widest in almost five years, the spread over similarly dated Spanish bonds was 54 basis points.

Including dissidents inside Renzi’s own party, as well as former Constitutional Court judges and other magistrates, philosophers, historians and trade union leaders, the forces arrayed against Renzi are a jumble of opposition parties -- from Silvio Berlusconi’s Forza Italia to the separatist Northern League.

Five Star is at the forefront of the “No” campaign. The party has risen to become one of European Union’s biggest insurgent forces and it was founded as a maverick web-based movement in 2009. It wants more leeway for public investment within the bloc’s budget rules and wants a referendum on Italian membership in the euro area, and therefore echoes the anti-EU stand of populist parties like France’s National Front.

The temporary front could prove a stepping stone to national power even as the group has ideological difference with many of the other opponents of Renzi’s reform. The party is aiming to push Renzi out after the vote and then win the subsequent election.

Arguing that greater stability to a political system that has seen 63 different government since World War II would be brought by his plans to curb the powers of the Senate, the prime minister is fighting back. But just as his personal popularity is declining, by promising to quit if he loses, Renzi has turned the vote into a referendum on his premiership for many Italians he made a crucial mistake at the outset of the campaign, he acknowledges.

“I’m not capable of staying in the swamp,” Renzi said in an interview on state-owned RAI television on Sunday evening. “You stay in power as long as you can change things.” The premier stopped short of saying explicitly he would quit if he loses, saying: “Politics isn’t the only thing that counts in life.”